Political risk is always a problem
There’s a rather Puritan movement in the UK at present – a desire to stop people doing what they enjoy doing. We see it in all sorts of things: sugar taxes, forced reformulations of foods, and, the issue that concerns us here, the stakes that gamblers may use.
The past couple of years have seen an ultimately successful campaign to limit the stakes that can be used on Fixed Odds Betting Machines – FOBTs. The argument was that by being able to stake up to £100 a time on what are essentially versions of the one-armed bandits problem, gamblers were… well, they were going to have problems. This is a harm they should be protected from.
The merits or not of this can be argued whichever way we want. The fact is that the campaign succeeded. Such stakes were limited to £2 a game.
There is now the argument being made that stakes on online versions of similar games should also be so limited. What we think of this is also up to us. What is important to us here is what happens to the share prices.
Well, obviously enough, those of the firms involved fell. The next question is, well, what might we do about it? The answer is that maybe the election will lead to a government that enacts this policy, maybe it won’t. But those stock prices are going to bounce around depending upon the political winds.
This will be as with Brexit and sterling. As Brexit becomes more likely, sterling falls; the less it looks likely, or the more the deal offered mimics EU membership, the more it rises. The same will be true of these gambling stocks. If the idea looks like being enacted, the stocks will fall further. The more the idea gets kicked into the long grass, or even categorically put aside, the more they will rise.
Our strategy is thus to monitor that political conversation and then faites vos jeux as we see fit.
The APPG on Gambling Harm
It’s worth noting that an All Party Parliamentary Group isn’t anything official. It’s just whatever grouping of like-minded parliamentarians want to get together on something. It’s not a committee, it’s not an official function at all. In theory, it would be possible to have one on bird-watching where the members go out to the terrace and look at the tweeties on the Thames. For all I know, there is one.
However, the APPG on gambling-related harm does have some power. They were able to get that stake limit imposed upon FOBTs, after all. We might think their current report is tendentious, we might not, but they are influencing the markets, which is all the power we need care about.
Online casinos should be subject to maximum stake limits similar to the £2 limits imposed on fixed-odds betting terminals (FOBTs), according to a report released by a group of MPs who are demanding a “root and branch” overhaul of gambling law.
In a wide-ranging report, members of the cross-party group on gambling-related harm – who include high-profile Conservatives such as Iain Duncan Smith – called for a raft of measures to protect vulnerable people.
Their recommendations include:
A £2 stake limit on online slot machines.
An end to betting by credit card.
The market did indeed react, as we can see:
Shares in UK betting firms have fallen after a cross-party group of MPs called for measures to overhaul online gambling and protect vulnerable people.
Flutter Entertainment (PDYPF)
(Flutter Entertainment share price from London Stock Exchange)
It’s that last drop on the right-hand side that comes from just the preliminary report.
GVC Holdings (GMVHF)
(GVC Holdings share price from London Stock Exchange)
William Hill (WIMHY)
(William Hill share price from London Stock Exchange)
888 Holdings (EIHDF)
(888 Holdings share price from London Stock Exchange)
As we can see, the news has had significant short-term effects on those stock prices. This then adds political risk for all of those four stocks.
As the proposed limit on stakes becomes more likely, the stock prices will fall further. Recall, these movements are just from an entirely unofficial report as yet. If the idea is entirely ruled out, then they will rise, quite strongly.
Monitoring the political likelihood can thus be traded using these stocks. A Conservative win at the next election makes the stake change less likely, although doesn’t exclude it entirely. A Labour win, well, they’ve already said they’d like to have such a limitation.
In terms of who is most likely to be affected by such a ban, I would say that it’s 888 Holdings. The company is, more than the others, reliant upon casino-style games, which this ban is aimed at. That also means it’ll gain the most from a reversal or kicking into the long grass.
As we can see, Flutter is the least affected as of now. The Paddy Power bookmakers business isn’t affected at all, and the Betfair business is largely sports betting and peer to peer – not something affected.
William Hill stock’s reaction already looks overdone, given the company’s significant non-casino online businesses.
Thus, if we think that the ban is going to come into being, then it’s 888 that will suffer the most. Equally, if it is reversed, the stock will gain the most. And to be honest, that William Hill reaction seems overdone already. “Sectoral pollution” we might call it, rather than a rational rerating.
The investor view
In terms of the stocks, they’ve just been made less valuable. Political risk always does do that, even if the risk itself doesn’t come to pass. But this also provides a trading opportunity. As the argument swings to and fro, those stocks will bounce around depending upon the likelihood of the stake limitation. Being able to read the political tea leaves could thus lead to a series of profitable trades.
One thing is for sure, this won’t be a one iteration argument – there will be swings one way and then the other. Timing will be important but equally profitable.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.